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III. Developing Key Performance Indicators and Productivity/Performance Benchmarks

for Performance Based Remuneration Systems in Malaysia

By MR EDDIE ONG

MS LEE SAW HOON

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1.0 Malaysia’s Economic Development

Malaysia had made significant strides in nation-building, in developing its

economy and in improving the quality of life of its people. Since

independence, real gross domestic product (GDP) has grown by an

average of 6.5% per annum for the period 1957-20055, one of the highest

growth rates achieved by sovereign nations of similar age and size.

Within the same period, GDP per capita in current prices grew by 7.0%,

which has translated into substantial improvements in the people’s quality

of life. The Malaysian economy grew at an average rate of 6.2% per

annum for the period 1991-20056. This strong rate of growth was

achieved despite the challenges faced from events such as the 1997-98

Asian financial crisis, the September 11 incident in 2001, wars in

Afghanistan and Iraq, outbreaks of Severe Acute Respiratory Syndrome

(SARS) and avian flu, as well as increases in world oil prices.

Economic fundamentals remain strong. Growth was achieved with

inflation averaging a low 2.9% per annum and similarly low unemployment

averaging 3.1% over the period. Malaysia’s economic structure continued

to develop from manufacturing to services as shown in Table 1. Growth of

knowledge-based service industries was expanded with the establishment

of the Multimedia Super Corridor in 1996, followed by other initiatives such

as the National Biotechnology Policy launched in 2005 and the Iskandar

joint project carried & North Carrider Project launched recently.

5 Ninth Malaysia Plan, 2006-2010 6 Ibid

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Table 1 : Structure of the Economy, 1990-2005

% to GDP 1990 2005

Services 46.8 58.1

Manufacturing 24.6 31.4

Agriculture 16.3 8.2

Mining 9.4 6.7

Construction 3.5 2.7 Source: Department of Statistics

The growth momentum of the Malaysian economy continued in 2006, with

a GDP growth of 5.9%. This was attributed to the diversified economic

structure, strong public and private sector expenditures, enhanced

delivery system and an impressive trade performance. Malaysia had

been registering trade surpluses since 1997, Strong fundamentals in

terms of low unemployment, low interest and inflation rates further

enabled Malaysia to strengthen amidst global volatilities. This strong

economic background coupled with the intensified implementation of

productivity and quality initiatives by industries have contributed to a

productivity growth of 3.7%7. All sectors of the economy recorded an

upward trend in productivity ranging form 0.5% to 4.5%.

2.0 Competitiveness Environment Factors

The competitiveness environment of a nation can be seen through four

main areas, namely; Macroeconomic Perspective, Government Efficiency,

Business Efficiency and Infrastructure. The macroeconomic factor

7 Productivity Report, 2006

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captures the macroeconomic evaluation of the domestic economy. It

encompasses international trade, international investment, employment

and prices. For this factor, Malaysia was ranked 11th position among 61

economies. Malaysia also performed relatively well in terms of exports

and was ranked 3rd. Exports picked up strongly in 2006, rising by 11.4%

to US$140.9 billion from US$126.5 billion in 2005. Malaysia’s current

account balance placed the economy in 4th position at 15.7% of GDP

compared to the 61 country average of 0.3%.

Competitiveness Input Factors 2006 2005 (61 economies) (60 economies)

Economic Performance 11 8

Government Efficiency 20 26

Business Efficiency 20 25

Infrastructure 31 34 Source : World Competitiveness Yearbook (WCY) 2006

The Government Efficiency factor assesses the extent to which

government policies are conducive to competitiveness. The sub-factors

are public finance, institutional framework, business legislation and

societal framework. For Government Efficiency, Malaysia improved to 20th

position from 26th previously. Malaysia performed well and ranked 6th

position in terms of perceptions on the Government Efficiency factor for

the following areas; policy makers being able to understand economic

challenges; exchange rate policy supporting the competitiveness of

enterprises; and labour legislation which provides an incentive to look for

work.

The Business Efficiency factor examines the extent to which enterprises

are performing in an innovative, profitable and responsible manner. It is

measured through the five sub-factors of productivity and efficiency,

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labour market, finance, management practices, as well as attitudes and

values. The ranking for Business Efficiency improve to 20th position from

25th previously. Labour cost in Malaysia continues to be competitive, as

wage increase commensurates with productivity growth. Malaysia

continued to record top ranking in unit labour cost in the manufacturing

sector. The favourable increase in labour force growth of 4.1% compared

to the 1.7% growth recorded the previous year led to Malaysia being

ranked 3rd.

The Infrastructure factor looks at the extent to which technological,

scientific and human resources meet the needs of business. It

encompasses basic infrastructure, technological infrastructure, scientific

infrastructure, health, environment and education. Malaysia improved its

infrastructure ranking to 31st position from 34th position previously. For

internet cost, progress in the state of information technology,

telecommunications and internet capabilities, Malaysia is ranked 3rd. The

role of science and technology in the economy, and more specifically in

education was favourable and was also ranked 3rd. This is reflective of the

perception that science in schools is sufficiently emphasized.

3.0 Human Resource Issues and Challenges

The Industrial Master Plan (IMP3), 2006-2020, emphasizes two aspects of

human resource requirements, namely, ensuring sufficient availability of

the human resources, as well as providing a facilitative environment for

the workforce to acquire the necessary skills in the professional and

technical fields to drive the economy into higher value-added activities.

Strategies for human resource management, including human resource

planning and development, will focus on the roles of education, training,

lifelong learning, capacity building and operating environment to enhance

Malaysia’s competitive position as outlined above. In the longer term,

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strategies adopted on human resources will lead to a more equilibrium

labour market, as well as more competitive business operating

environment. Appropriate systems and structures for human resources

planning will enable Malaysia to respond to the changing global

environment and enhance competitiveness at the national and enterprise

levels.

3.1 Human Resource Policy Thrusts

Human resource development continued to be given priority in support of

the implementation of a productivity-driven growth which required highly

skilled, trainable and knowledge manpower. Emphasis continued to be

given to increase accessibility to education to all levels in line with the

democratisation of the education policy. In addition, the education and

training programmes focused on improving the quality of teaching and

learning materials, teacher training the educational support services. At

the tertiary level, the capacity of public tertiary institutions expanded

substantially. However, it was still inadequate to meet the demand.

Consequently, enrolment in private educational and training institutions

also expanded significantly, which was facilitated by the liberalization of

the education sector.

A trained workforce with the potential and ability to optimize the use and

development of new technologies and materials will continue to be

important in ensuring the growth and resilience of the economy. There will

be increasing investment in human capital, with greater emphasis on

nurturing creativity and cognitive skills to provide the impetus for the K-

based economy. The education and training system will be geared to

produce multi-skilled and knowledge manpower that is versatile, willing to

learn continuously. Entrepreneurial as well as with the ability to acquire

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and apply knowledge particularly in modern technology. In this regard, the

human resource policy thrusts will be as follows:

• Expanding the supply of highly skilled and knowledge manpower to

support the development of a K-economy;

• Increasing the accessibility to quality education and training to

enhance income generation capabilities and quality of life;

• Improving the quality of education and training delivery system to

ensure that manpower supply is in line with technological change

and market demand;

• Promoting lifelong learning to enhance employability and

productivity of the labour force;

• Optimizing the utilization of local labour;

• Increasing the supply of Science and Technology manpower;

• Accelerating the implementation of the productivity-linked wage

system;

• Strengthening labour market information system to increase labour

mobility;

• Intensifying efforts to develop and promote Malaysia as a regional

centre of educational excellence; and

• Reinforcing positive values.

To support the above, industrial harmony is of utmost importance.

Concerted efforts by all parties involved in ensuring harmonious industrial

relations in the country such as the Government, Employers and

Employees is of paramount importance.

3.2 Human Resource Practices at the Organisational Level

3.2.1 Managing and Enhancing the Value of Human Capital to increase Productivity

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Challenges of today’s organizations To demonstrate the linkage between employee resilience and

business performance.

To articulate best practices in diversity strategy and leadership.

To explore the frontier of work-life integration.

To shift the focus from financial capital to human capital.

To attract and retain the best possible workforce.

To motivate, satisfy and challenge the workforce.

To define the workforce requirements to support organizational

objectives.

To improve client or shareholder value.

Creating value through people Repositioning of the HR function − HR integral part of the senior executive team.

− Role elevated to strategic business partner.

− Introduction of HR consultancy or advisory model.

Shifting Organisational Culture − Integral role of culture, values and principles.

− Model has shifted from employment security to an

“employability” model.

− Integrated leadership and accountability.

Two sides to the coin ….. Employer branding

A better work place

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growth

8

Brand Positioning Committed to delivering products and solutions that are :

Designed around you

Easy to experience

Advanced

The pressure on HR ….. Lean – focus on outcomes rather than activities

Not a cost centre

Employee champions

− Deliver competent and committed employees

− ISO, HRPST, PBE, ICS

Administrative experts

− Deliver efficient HR practices

− E-tools (salary planning, leave, requisition, HR policies &

procedures, recruitment, talent track, job descriptions, etc.)

Change agents

− Deliver capacity for change in individual behavior and

organizational culture

− PPM, EES, talent management, rewards communication, value

statements

Strategic partner

− Deliver business results

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− Part of Executive Management Committee & Management

Team

− One page strategy supports Management agenda

− Country BSC and HR BSC

“Do more with less”

Building our employer brand from the inside out

Key Objectives: To be certain that we are able to attract, recruit and retain the sort of talent that

will give our business competitive edge.

To be sure that our employer experience will enable and motivate our talent to

work in a way that is “one Organisation”, providing maximum satisfaction for

both the organization and the individual”.

On-Line Interaction for New Employees

The introduction period lasts 3 months and the new hire is supported by :

HR, line manager and buddy

CD-ROM

Website / System

What does it do?

Makes new employees feel welcome!

Helps new employees get started quickly, by providing basic company

information right from the start.

Provides new employees with personal guidance by assigning them a

buddy.

Gives manages a proven, easy procedure for introducing new

employees successfully.

Clearly defines the roles and responsibilities of HR and line

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management.

What is the role of HR?

Recruitment phase

Initiating the introduction process by entering the details of a new

employee on the website and sending a welcome package.

Running through administrative issues with the new employee on the

first day.

Explaining the buddy system and monitoring progress.

Evaluate the introduction period after 3 months with the new hire.

What is the role of the Line Manager? Assign a buddy to the new hire.

Welcome the new hire on his or her first day.

Introduce him / her to the organization, colleagues and department.

Explain the organizational structure and strategy of the department.

Formulate performance expectations.

Discuss training opportunities.

Evaluate the introduction period after 3 months.

What is the role of the Buddy? The buddy should be a close colleague with a similar job grade (not to

be confused with the role of a mentor, who is normally a more senior

manager).

The buddy is responsible for :

− Welcoming the new hire on the first day (develop a first day

schedule).

− Helping the new employee with practical issues (reslurces

necessary to start working, canteen, coffee machine, etc.)

− Explaining social rules and customs.

− Being available for questions.

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− Keeping in Touch with the new hire on a regular basis.

A better workplace ….. The Organisation is you Simplicity is the name of the game

− HR automation

− Performance Management

− Learning

− Our website

Communicate! Communicate!

− Organisation values

− Leadership competencies

− Business principles

It’s about being open

− Compensation and you

− Talent management

Employee Engagement Survey

3.3 People Performance Management 3.3.1 The People Performance Management philosophy …….

The essence of PPM is to create quality dialog between the employee

and manager, which is truly focused on an employee’s performance

and development.

PPM is a global process that aligns the employee’s personal

objectives with those of the business.

PPM is about looking back at the past period and looking forward to

the coming period.

Performance focuses on what has been achieved (results), but also

how it has been achieved.

Development focuses on the employee becoming better at their

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current job and growing into other roles in the future.

The PPM process starts with a self-evaluation by the employee and

can include co-assessment (s).

Calibration is used to ensure a fair and realistic assessment and to

increase the level of objectivity.

The performance rating is used as input for reward decisions.

PPM is web-based.

3.3.2 What’s in it for me? As an employee You have a clear understanding of how you contribute to realizing business

goals.

You know what is expected from you in your job.

You learn to what extent you meet these expectations.

3.3.3 As a manager You deploy and realize business goals with your team.

You have the opportunity to improve the effectiveness of your team members

and establish a performance culture.

You set clear objectives for your employee and evaluate your team members

on what they do in their job and how well they do their job.

Performance Review

Personal Details Performance Review 2006 Performance Plan 2007 Development

3.3.4 Key Areas of Responsibility Leading account management team for product range X .

Simple tab structure

X Cancel Save & Close Print

Meng Manager Input

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Planning and driving customer service initiatives for key accounts.

Setting the strategic direction for product range X.

Strengthen marketing capabilities in the organization for all new product

launches.

Work together with ABC to identify product and marketing requirements for

product range XYZ.

Take ownership for managing the commercial processes between business

units and the different regions to achieve the business targets.

3.3.5 Employee comments on last year’s performance My key areas of reasonability were the same as last year. However, this year I

have been able to better lead my account management team as this is my

second year in the job. Also, this year I focused more on identifying customer

service initiatives for our key accounts. Based on client feedback I managed to

create well received initiatives.

3.4 SMART Personal Objectives (including Measurable Targets) Employee review

Manager feedback

Objective 1 Realize @ 8.2 million sales with accounts identified in the account plan 1/1/2006 and 31/12/2006

Rating Met Annual Incentive achieved

(Agreed maximum : 25) 25 (Agreed maximum : 25)

Comments For all the key accounts I identified in my account plan, I achieved more than the @ 8.2 million sales this year.

Objective 2 Improve client satisfaction for product range X by a full point to 4.3 as measure by the annual customer survey in Q4, 2006.

Rating Partially met. Annual Incentive achieved

(Agreed maximum : 15) 10 (Agreed maximum : 15)

Comments This year, our client satisfaction was was 4.1. This is already significantly

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higher than last year, when our score was 3.3. Also, we received informal feedback from clients who mentioned to be very satisfied. Based on this, I have partially met my objective.

Objective 3 Setting the strategic direction for product range X and deliver a strategic business plan before 1/3/2006 which is approved by the MT.

Rating Met Annual Incentive achieved

(Agreed maximum : 25) (Agreed maximum : 25)

Comments My strategic business plan was approved by the MT.

Leadership Competencies Excels Exceeds Fully Meets

Partially Meets

Requires Action

Pursue market insight Create innovative strategies Inspire commitment Leverage capabilities Champion people’s growth Drive for results

Employee review

Manager feedback

Strengths What went well this year, that

Minimum of entry boxes

Employee fields on the left side of the document manager fields on the right side

Via this button leveling guidance will be offered in terms of example behaviors in relation to corporate

d

The new Philips Leadership Competencies, in which the Values

have been integrated, are now part of performance evaluation. Separate

information will follow soon.

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in my team sales objectives have been met. We created innovative strategies and I am aware of the market situation.

Areas of improvement

However, my area for improvement is my focus on client improving the client satisfaction score, I should focus more on this. Also, I could focus more on champion people’s growth. Maybe best to share my views and learning from client situations with my team.

3.4.1 Summary of Evaluation Please click in the grid to indicate your proposed rating.

Manager comments regarding performance and promotability.

Excels Exceeds Fully

Meets Partially Meets

Requires Action

Fast Track

Growth Path

Well Placed

Focus on strengths and areas for improvement

Minimum of entry boxes

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3.4.2 Performance Plan Personal Details Performance Review 2006 Performance Plan 2007 Development

Key Areas of Responsibility New Period Below you will find the adjusted key areas of responsibility as proposed by the employee. You can update these directly. Leading account management team for product range X for the EMEA region. Planning and driving customer service initiatives for key accounts in EMEA. Setting the strategies direction for product range X. Strengthen marketing capabilities in the organization for all new product launches. Work together with ABC to identify product and marketing requirements for product range XYZ. Take ownership for managing the commercial processes between business units and the different regions to achieved the business targets. Proposed SMART Personal Objectives (including Measurable Targets) Below you will find the personal objectives as proposed by the employee. You can update these objectives directly.

Employee review Manager feedback

A1 Distribution

A1 Distribution

Realize @ 9.0 million sales with accounts identified in the account plan between 1/1/2007 and 31/12/2007.

30 Realize @ 9.0 million sales with accounts identified in the account plan between 1/1/2007 and 31/12/2007.

30

Improve client satisfaction for product range X to 4.5 as measured by the annual customer survey in Q4,, 2006 and conduct a midyear client satisfaction survey to track progress.

15 Improve client satisfaction for product range X to 4.5 as measured by the annual customer survey in Q4,, 2006 and conduct a midyear client satisfaction survey to track progress.

15

Set up a system to share findings and learning within my team to be better prepared for client meetings.

10 Set up a system to share findings and learning within my team to be better prepared for client meetings.

10

Manager can edit employee’s proposal in order to define the final

wording for the KARs and objectives John Doe

Manager Input

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Hold a bi-monthly meeting with the top 10 key accounts to inform them of the latest products.

25 Hold a bi-monthly meeting with the top 10 key accounts to inform them of the latest products.

25

Coach my account team by having regular meetings with my team members.

20 Coach my account team by having regular meetings with my team members.

20

Personal Details Performance Review 2006 Performance Plan 2007 Development

3.4.3 Development Development Activities Previous Period

Follow the training “focus on the markets”

Work together with the account manager for product range X in region APAC

to learn from him.

Employee review

Manager feedback

I have followed a training “focusing on the markets” and based on that one of my objectives is to create regular meetings with key accounts. I also worked together with the APAC regional account manager. This was very successful and made me aware of a lot of important issues.

Development Activities New Period based on strengths ad areas for improvement Below you find the new development activities as proposed by the employee. These activities are based on the employees strengths and areas of improvement derived from

Minimum of entry boxes Maximum of 6 objectives

Employee fields on the left side of the document manager fields on the right side

John doe Manager Input

People Performance Management

Minimum of entry boxes

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the employees (Functional) Competencies. You can update these new activities directly. I can still develop myself by using what I have learned from the training “focusing on the markets”. Further on I want to develop myself on “champion people’s growth”. For this reason I will follow a training for coaching. 3.4.4 Career Employee

Manager

Career Aspirations

Manager comments on career

I would like to grow to a role where I have the responsibility for product XYZ in the APAC region. I know the EMEA region very well and am very interested in working in the APAC regions because of the dynamics going in here.

My Mobility Mobility Regional Regions Asia-Pacific Rim & Australia Restrictions Midyear development conversation Please Indicate if you foresee the need for an additional specific midyear development conversation. If the employee and / or manager indicate “yes” and email will be sent to both parties halfway the year to indicate them to start the development process. Employee

Manager

No

Yes No

Manager can edit employee’s proposal in order to define the

final wording for the development activities

Functional Competencies will be available via a web link to serve as inspiration for indicating the strengths and areas for improvement, but

will not be rated anymore

Employee fields on the left side of the document manager fields on the right side

Minimum of entry boxes

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3.4.5 What else will be new?

Tool will be available throughout the year to work on development

and to define KPIs and objectives e.g. for new employees (manager

formally accepts, HRM receives copy).

No colleague feedback option anymore (only 9% made use of this).

Co-assessor input will be much more focused and co-assessor can start immediately after employee has submitted input.

More flexibility for HRM Manager in creating and importing calibration

grid at all times before PPM meeting phase (administrative

unburdening HRM managers).

Please note all relevant data of the last PPM cycle will be transferred to PPM light.

Default mode : end-year meeting focused on performance as well as development. There is an

option to choose for an additional mid-year development meeting

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3.5 Rewards & Communication 3.5.1 Overview of rewards programs offered

− Sports/social activities − Annual dinner/family day − Corporate sustainability programs

− Outpatient medical benefits − GH&S insurance − Executive Screening Program (CG 60 & above) − Dental / eye care − Group Term Life − Group Personal Accident − Retirement gratuity

Club

Leave with Pay

Other Benefits

Supplementary Benefits

Statutory Contributions

Incentive Programs

Fixed Allowance

13th Month Salary

Base Salary

− Annual leave − Medical leave − Compassionate leave − Examination leave

− Festival advance − Education assistance − Service awards − Phil Shares − Flexi time − Maternity benefits

− EPF − SOCSO

− Annual incentive (non- sales) − Sales incentive/ commission (sales) − Restricted Shares/SO

Car allowance CG60 & above

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3.6 Talent / Management Development 3.6.1 Developing talents

Career planning with our Career Center

Single website with all Philips’ vacancies

Offers hints and tips on career and development

People Development

Performance Management :

Assess : not only what you do but also how you do it

Core Curricula :

‘One Organisation’ way of learning

3.6.2 The Management Development Process

Who will fill our key positions now and in the future?

Succession planning

Performance reviews

How have they performed against business objectives and

competencies or values?

Competencies

Talent Identification: What is their potential? What steps do they need

to take to develop?

Management Development is a Partnership with Joint Accountability between : Company / HR Provide tools, processes and systems to enable

and support development and succession planning.

Managers Recognize, plan, coach, develop and monitor the

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skills and talents of employees.

Employees Contribute to and plan for the future. Have a self-managing mindset about careers.

3.6.3 Learning & Development

3.6.4 Diversity & Inclusion

The total blended learning solution

Experience On the job

Working with different managers Networking

Networking opportunities

Special assignments

Classroom activities

E-learning

Guidelines for on the job coaching/ instruction

Company

Gross Culture Age

Skills

Personal Style

Orientation

Country Knowledge

Personality

Community Experience

Electricity

Perspective

Business Experience

Educational Background

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Diversity The term “diversity” symbolizes our recognition that our workplaces,

marketplaces and communities are made up of individuals: men and

women from different nations, cultures, ethnic groups, generations,

background, skills, abilities and all the other unique characteristics

that make each of us who we are.

We can better understand our customers and better identify their

needs when we have a diverse workforce that mirrors our worldwide

customer base.

Inclusion The term “inclusion” symbolizes an environment where everyone can

fully participate in creating business success, and where each person

is valued for his or her distinctive talents (skills, experiences,

perspectives, etc.)

An inclusive working environment engages people, enhances decision

making and increases creativity and innovation in support of our vision

and brand positioning.

3.7 Employee Engagement Survey 3.7.1 Engagement is essential to achieve our business agenda

As a company, we know where we want to be and what we need to

get there.

Engaged employees are, just like happy clients, a condition for

Physical Abilities

Life Experience

Thinking Style

Gender Passion Language

Faith Religion

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growth.

Yet, there is a gap between where we want to be and what our people

tell us.

Topics that keep coming back are consistent through all sources;

strengthen people leadership to get the best out of people, ensure

alignment on direction and reduce complexity to enhance people

ability to contribute, create and environment of trust and open dialog

to offer space for people to add value, behave consistently to

accelerate the pace of change.

Improvement to be done in these areas is a key to increasing

engagement.

3.7.2 Positioning engagement?

Engagement is about creating an inclusive and high-energy working

environment, where all employees are aligned to and energized to contribute to

our business success. An engaged workforce delivers a competitive

advantage – our people are highly motivated to give their best every day.

Someone who is engaged typically :

- goes above and beyond the normal demand of the job

- helps others with heavy workload

- volunteers for extra duties

- looks for way to perform jobs more effectively

- has higher level of customer satisfaction

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3.7.3 We need our workforce to say things like ………. 3.7.4 Key themes of Engagement

Me

Me & My Manager

Me & My Organisation

Me & Company

I am proud to work for Philips

I trust our leader ship

I believe in our Philips values

I I am inspired by the vision of Philips, I believe Philips has an outstanding future

I am an ambassador for Philips and its products

I matter, I can make a difference in this company

I care for my colleagues, my colleagues care for me

I belong to this group of people

I feel connected to my co-workers around the world

I believe we will achieve our goals

I am clear about our direction and how to contribute

I touch lives everyday

I do my job with passion

I enjoy going to work in the morning

My boss helps me to develop and grow

My boss brings the best out of me

My boss engages our team and is a leader

Being passionate and proud

This is about being an advocate for Philips, believing in what Philips stands for and its future. This is about being outspoken, taking a stand for what we believe in. This is about having a positive attitude. This is about individuals

Bringing out the best in each other

This is about making a personal commitment and using individual talent to play a role and contribute (Skill & Will) This is about building on motives, values and goals of each individual to help them contribute to the best. This is about

Trusting and being trusted

This is about being authentic and consistent between what we say and do. This is about communicating and measuring progress on what we say we will do. This is about earning trust by acting as role model. This is about trusting

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3.7.5 Process of Engagement in 2006? 3.7.6 Whose responsibility is it?

Engagement is a collective responsibility which needs to happen daily.

− Be passionate and proud, bring the best in each other, trust and

be trusted in all the things we do.

Demonstrate these behaviors of good people managers in daily work. Reinforce that engagement is a collective responsibility. If lots of people change just a little bit, a lot will change.

A few things done well, having an impact on the engagement at Philips, business unit, department or team level. Regular update to employees on progress using mix of communication

The survey will run for 136,500 employees with the same set of questions, primarily through the web. Every targeted employee will be pre-informed by local HRM and Manager about the importance to participate and invited per mail or paper.

4,000 reports will be generated. Based on these reports, deep dive sessions will be held across Philips, where managers, employees and HR discuss the outcomes and understand strengths and weaknesses.

In order to maximize the strengths and improve on weaknesses, teams will work on possibilities to offers.

Communicate/Educate: What is engagement and why is it important, how does it fit with the management agenda context, how does it fit with the leadership competencies.

Understand purpose and

context of engagement (now

to Sept).

Conduct the survey

(Sept. 6th to 20th)

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− Every individual can impact engagement within their own team.

− These changes at a local level then multiply to create significant

organizational shifts.

3.7.7 List of Questions from the Engagement Survey

1. I believe the company has an outstanding future

2. I trust the leadership of the Company

3. I trust my manager

4. My manager is an active role model for the company’s values

5. The leadership of the company has communicated a vision of the

future that motivates me

6. I have a clear picture of the direction in which the company is headed

7. My organization has a climate in which diverse perspectives are value

8. The management style in this organization brings out the best in

employees

9. My management has acted on issues identified in the previous

employee engagement survey

10. I feel adequately informed by my management on our business goals

11. There is good cooperation between my department and other

departments

12. I rarely think about looking for a new job with another company

13. I would gladly refer a good friend or family member to the company

for employment

14. Overall, I am extremely satisfied with the company as a place to work

15. I feel proud to work for the company

16. My job makes good use of my talents and abilities

17. I have the training I need to do my job effectively

18. My manager has facilitated my growth and development

19. My manager provides me with coaching that is helpful in improving

my performance

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20. I receive the information and communication I need to do my job

effectively

21. In my organization there is open and honest two-way communication

22. My manager clearly communicates what is expected of me

23. My manager is usually receptive to suggestions for change from

employees

24. I feel that I am part of a team

25. My ideas and suggestions count

26. My manager really cares about my well being

27. I am encouraged to come up with new and better ways of doing things

28. All employees in the company are treated as individuals regardless of

age, race, gender, physical capabilities etc

29. I am involved in decisions that affect my work

30. I am given sufficient authority and freedom by the organization to do

my job well

31. My manager provides me with timely and helpful feedback

32. I think my performance is evaluated fairly

33. I regularly receive appropriate recognition when I do a good job

34. My organization provides equal opportunities to all employees

35. The compensation plans of Philips reward outstanding job

performance

36. In my current job, I am satisfied with my pay and benefits

3.7.8 How should the process look like?

Understanding

Re-measure Discussion and

Ownership

Re-survey Share results Set goals

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As a result : We create the readiness for the organisation to seize business opportunities and

gain competitive edge through workforce globalization.

4.0 Labour Market Situation

During the first half of the Second Industrial Master Plan (IMP2), 1996-

2005, the manufacturing sector recorded a tight labour market, largely due

to the full employment situation and the robust performance of the sector.

The Asian financial crisis adversely affected economic growth and

employment. In response, measures were undertaken to accelerate

economic recovery and address unemployment. These included

Government initiated programmes to improve employability through

retraining and skills upgrading, as well as greater emphasis on productivity

and competitiveness.

While Malaysia offers a pool of talented human resources, there is

presently a shortage of skilled workforce in specialized fields in

engineering, information and communication technology (ICT) and high

technologies. To overcome this shortage, companies engaged foreign

experts and specialists. As of 2005, there were 35,480 expatriates

employed in Malaysia, with 18,679 (52.6%) in the services sector, 40.6 %

in the manufacturing sector, 2.8% in the construction sector and 0.2% in

the plantation sector. Expatriates were generally employed in the higher

managerial category and specialized fields, such as oil and gas,

biomedicine, research and development (R&D), ICT consultancy and

Action and commitment Review

Monitor and support progress

Develop an action plan Share the plan

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software management. To increase the availability of local experts, the

Government implemented the Brain Gain Programme to attract Malaysian

talents abroad to return.

A large number of foreign workers are employed in tasks which require

lower skills. As at 2005, there were 1.8 million foreign workers in the

country, with 581,379, or 32%, in the manufacturing sector, 26.1% in the

plantation sector, 15.5% in the construction sector and 8.8% in the

services sector. These workers were employed in jobs for which

Malaysians were not available or not willing to fill.

4.1 Industrial Relations in Malaysia

Generally, the extent of unionization in Malaysia is low for two main

reasons, first the predominance of small-scale manufacturing and services

establishments; second the prevalence of contract labour. The Labour

Law in Malaysia is well established. Among the Labour Laws in Malaysia

are the Employment Act 1955, Workers Housing and Amenities Minimum

Standards Act 1990, Workers Compensation Act 1952, Young Person and

Children Act 1966, Wages Determination Council 1947, Weekly Holiday

Act 1950, Employment Information Act 1953, Employment Limitation Act

1968, Industrial Relation Act 1967 and Trade Union Act 1959.

The extent of unionization in Malaysia is low for two main reasons, the

predominance of small–scale industries and service establishments; as

well as the prevalence of contract labour. The Congress of Union of

Employees in the Public and Civil (CUEPACS) represent the public sector

while the Malaysia Trade Union Congress (MTUC), registered with the

registrar of societies functions as the voice of Malaysian trade unions at

both the national and international levels. It also represents workers on

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tripartite organizations such as the National Labour Advisory Council

(NLAC),

Private sector employers in Malaysia are represented in the central

organization known as the Malaysian Employers Federation (MEF).

Established in 1978 following the dissolution of the Malaysian Council of

Employers’ Organisation, the MEF is registered under the Societies Act

1986 and includes both ordinary and associate members. The MEF

advises its members on how to deal with trade union claims, helps to

prepare counter-proposals and assists in negotiations of collective labour

agreements. It also represents employees in the NLAC and Wages

Council.

It is important to note that matters pertaining to labour and industrial

relations come within the jurisdiction of the federal government as

stipulated by the Malaysian constitution. Hence the Trade Unions

Ordinance and the Industrial Relations Act apply throughout the country.

Voluntarism is the basis of collective bargaining in Malaysia. When an

employer or a trade union serves notice of its intention to commence

collective bargaining, the receiving party is required to respond within 14

days. If the response is positive, collective bargaining should commence

within 30 days of the reply. If negative or if the bargaining otherwise does

not commence within the 30 days period, the party serving notice may

notify the Director General of Industrial Relations who may then take the

necessary action to persuade both parties to the commence bargaining. If

there is still no success at that stage, then a trade dispute will legally exist.

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4.2 Legal Environment for Employment The present labour laws include:

Act Major Provisions Employment Act 1955 - all manual and non-manual workers earning

RM1,500 and below;

- minimum benefits and rights of employees,

including working hours, annual leave and

public holidays, overtime rates and sick

leave;

- issues such as termination and

retrenchment

The act was amended in 1998 to allow, among others, for workers earning

RM5,000 and below to complain to the Labour Department for violation by the

employer of any term and condition of the employee’s contract of service. The

Act was last amended in 2000.

Industrial Relations Act 1967 Governs the relationship between employers

and employees and their trade unions, and the

prevention of settlement of differences of

disputes arising from the relationship.

Social Security Act 1969 Covers workers who earn RM3,000 and below.

The act provides for benefits and pension if a

worker is injured or disabled during working

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hours, or while traveling to and from work. It

was last amended in 2005.

Occupational Health and Protects the worker against unsafe work sites

Safety Act 1994 and unhealthy work practices.

4.2.1 Industrial Relations Act, 1967

The Industrial Relations Act regulates relations between employers and

employees and their Unions. The main objective of the IR Act is to

resolve trade disputes. The Act embodies four important principles:

• The principle of trade unionism

• The principle of recognition

• The principle of collective bargaining

• The principle of resolving disputes

The Industrial Relations Act requires that a collective labour agreement

be concluded and deposited with the Industrial Court every three years.

Once the court takes cognizance of the agreement it becomes bindings,

and any violation of its provisions constitutes an offence under the law.

However, before taking cognizance of the agreements, the court sends

some of them back to parties for amendments.

The dispute settlement machinery in Malaysia provides for conciliation and

arbitration. The Industrial Relations Act empowers the Director General of

Industrial Relations and the Minister of Human Resource to conciliate

labour disputes. The Director-General can inquire into the causes and

circumstances surrounding the dispute and bring the parties together or

appoint an arbitrator if both parties agree. The Minister can intervene in

any dispute for the purpose on conciliation and if appropriate, may refer

the case to the industrial court of arbitration.

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The Industrial Court, constituted under section 30 of the Industrial

Relations Act, 1967, hears cases brought by the parties or referred by the

Minister. The Court has jurisdiction over four types of cases : (a) unfair

dismissed claims, (b) interest disputes, (c) interpretation of collective

agreements or awards and (d) complaints of non-compliance. The

mechanism through which labour disputes are heard by the Industrial

Court is illustrated in Figure I.

Figure 1 Industrial Relations Process in Malaysia

Labour Legislation

Employer Trade Union

Employer Negotiation

Dispute

Conciliation

Minister act as conciliator Collective

Agreement

Industrial Court

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4.3 Industrial Relations: Issues and Challenges

The industrial relations in Malaysia is increasingly moving towards

cooperation and collaboration rather than confrontation. It has been

recognized that in the context of changing times, there is a need to work

together to survive. In any society, there is necessarily conflict in industry

between employers and employees, between the owners of goods and

services and those who work to produce these goods and services. The

objective of Malaysia’s industrial relations system is to direct the forces

producing conflict towards constructive ends.

In accordance with this philosophy, employers and workers have grouped

together to advance and protect their separate interests. Trade Unions have

long been accepted as lawful, and the rights to strike and bargain collectively

have been similarly recognized. Likewise, employers have been allowed to

organize themselves into groups and to take legitimate action to protect their

interests. It has also been accepted that the Government should provide the

facilities to help the parties agree, but not to actively interfere to impose a

settlement on them .The issues surrounding industrial relations should be

centred on employability.

In the process, the following key challenge has to be resolved:

• Enhancing Employability

In line with the human resource policy thrusts mentioned earlier,

knowledge and skills of workers must be continuously enhanced.

High Court

Court of Appeal (final)

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Specifically, generic skills are a pre-requisite for employability and

workers must be more oriented towards technical skills and utilization

of high level technology. Management and Unions must work together

to develop a trained workforce who has the potential and ability to

optimize the use and development of new techniques and materials as

this will continue to be important in ensuring the growth and resilience

of the economy.

Human resource development facilities provided by both public and

private sectors in ensuring that workers are adequately trained must be

utilized. Negotiations between employers and unions must make this

issue a priority.

• Information Sharing

There is insufficient sharing of information between employers and

unions especially on financial issues. For the purpose of carrying out

his functions, the Director General for Industrial Relations under

subsection (4A) of the Act shall have the power to require the trade

union of workmen, the employer or the trade union of employers

concerned to furnish such information as he may consider necessary

or relevant.

• Conflict in Collective Agreements

Trade Unions would normally maintain their rights as per collective

agreement which is concluded once in three years. The Trade Unions

main concern is to protect the workers in terms of wage increments

and benefits while Employers normally plead understanding in the

context of intense competition and affordability. The Government had

proposed a wage system that is linked to performance as a fair way to

accord wage increments and bonuses. There is also a call to review

the Industrial Relations Act, to make it more in tune with the current

economic developments.

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• Outsourcing and Mergers

In the face of globalization and more intense competition, more and

more firms are going for outsourcing and mergers. In the process,

employees find that they have to cope with new environment, new

conditions of employment and security of tenure. The industrial

relations is currently inadequate in coping with this new trend. The

Industrial Relations Department is thus undergoing a reorganization of

their structure to be in line with the current economic scenario.

• Minimum Wages

The Malaysian Trade Union Congress (MTUC) has made a request

to the Government for establishing a minimum wage. A decision on

the matter is yet to be made. Another alternative to minimum wages

is to establish a wage system that is linked to

performance/productivity, where the wage system consist of two

components; the fixed component that ensures wage stability and the

variable component that ensures enhance performance.

5.0 Productivity and Wages

5.1 International Productivity Comparison In 2006, the productivity growth of Malaysia at 3.7% surpassed many of

the Organisation of Economic Cooperation (OECD) countries such as

Sweden (2.8%), Japan (2.5%), Germany (2.0%), Denmark (1.8%), USA

(1.5%), United Kingdom (1.7%), France (1.4%), Australia (1.0%), Canada

(1.0%) and Ireland (1.0%). Amongst Asian countries, Malaysia registered

higher productivity growth than Thailand (3.5%), Chinese Taipei (2.7%)

and Singapore (1.2%). However, China (9.7%), Indonesia (6.4%), India

(6.0%) experienced higher growth. The ongoing shift of the economy

towards higher value added and knowledge based activities, adoption of

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new technologies and innovations into business applications, strong

economic growth, increasing inflow of foreign investment and intensive

utilization of information and communication technology (ICT) had

contributed to the productivity performance.

The productivity level of Malaysia at US$11,716, was higher than that of

India (US$ 2,128), China (US$2,885) and the Philippines (US$2,914).

However, highly industrialized and matured economies such as Japan,

Norway, USA and Ireland with high GDP per capita, high degree of

innovation and a large pool of educated workforce recorded higher

productivity levels. Total research and development (R&D) expenditure as

a percentage of GDP of the OECD countries such as Sweden (3.9%),

Finland (3.5%) and Japan (3.2%) was higher than that of Malaysia (0.6%).

In addition, almost all the selected OECD countries showed higher

education achievement.

Table 4.1 Productivity Levels and Productivity Growth, 2006

Country Productivity Level Productivity Growth (2000 Constant Prices, US$) (%) Malaysia 11, 9716 3.7 Selected OECD Countries Japan 79,907 2.5 United States 77,989 1.5 France 58,190 1.4 United Kingdom 53,764 1.7 Canada 50,029 1.0 Australia 46,681 1.0

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Korea 28,956 3.7 Selected Asian Countries Singapore 48,782 1.2 Chinese Taipei 38,622 2.7 Thailand 4,202 3.3 Philippines 2,914 1.6 China 2,885 9.7 Indonesia 2,128 6.4 Source : National Productivity Corporation, Annual Productivity Report 2006.

The productivity growth of Malaysia which was higher than the OECD

countries was indicative that Malaysia is progressing towards achieving better

competitiveness globally. Malaysia has to continuously ensure that productivity grows at

a faster rate than the developed economies to achieve a higher productivity level which is

on par with these economies.

5.2 Labour Cost Competitiveness of the Manufacturing Sector, 2006

The manufacturing sector continued to improve its Labour Cost Competitiveness

by registering a 3.1% growth in Sales Value per Employee as compared to a

2.5% growth in Labour Cost per Employee (Table 2). Human resource

development, cost rationalisation initiatives and productivity and quality

improvement programmes undertaken by the manufacturing industries

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contributed to this performance. Unit Labour Cost (ULC) which is the labour cost

of producing one unit of product or service declined and thus enhanced

competitiveness as it is now cheaper to produce a unit of output. Unit Labour

Cost declined by 0.7%.

Table 4.2 shows the sales value per employee (proxy for productivity, Labour

cost per employee (proxy for wages) and unit labour cost. It is observed that in

situations where labour cost per employee grows faster than sales value per

employee, unit labour cost will increase such as in year 2002. It is therefore

imperative that wage increases should be commensurated with higher

productivity growth to enhance competitiveness.

Table 4.2: Labour Cost Competitiveness, Manufacturing Sector

2002 2003 2004 2005 2006

Labour Cost per Employee

4.47 4.42 3.14 4.42 2.5

Unit Labour Cost 0.68 -3.40 -12.04 -3.40 -0.7

Sales Value per 3.69 8.11 17.24 8.11 3.1

Employee Source : National Productivity Corporation, Malaysia 5.3 Wage System in Malaysia In the private sector, the wage structure may be in the form of a salary scale.

There is also a system of using the salary range. Minimum and maximum annual

increment may or may not be pre-determined until the employee reaches the

maximum in the salary range. In the unionized sector, employees have their

wages and other conditions of employment determined through collective

bargaining. At each renewal of a collective agreement there is always upward

revision of the starting salary, followed by annual increments in predetermined

steps which usually, but not necessarily, ends with a maximum. Besides the

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annual increment there is also the salary adjustment at the end of each three-

year period when a new agreement begins. An employee therefore receives an

annual increment each year and a salary adjustment once every three years.

The total increase over a six-year period was 81 per cent. The increase is not in

any way related to the company’s performance or the employee’s productivity.

The increase will be permanently built into the employee’s salary.

The main weakness of such a wage system is it’s inflexibility of any adjustments

either to the company or employee performance. Among the inhibiting features

are:

The general trend of wage increase is rapid and not related to productivity

improvement;

Collective agreements are usually fixed for a period of three years and

binding on both parties. The phasing in of wage increments is often out of

synchronization with economic reality at the time of implementation

because of the protracted delays in many wage negotiations;

Annual increments are pre=determined and are given automatically to all

workers regardless of the level of performance;

Remuneration is not related to company performance;

Terms in the collective agreement cannot be reduced even when a new

agreement is being concluded on the premise that once a benefit is

granted, it cannot be subsequently withdrawn even through in lean times.

Recognising the weaknesses of the current wage system; the Government

initiated a tripartite task force to develop guidelines on a Wage Reform System

which is linked to productivity in 1997 and in 2004, a Guiding Principles for the

implementation of Performance Linked Compensation among Government

Linked Corporations (GLC) had been developed.

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5.4 Performance Linked Compensation: Guidelines and Implementation “From a human capital standpoint, the right Performance Linked Compensation

(PLC) programme will enable corporations to attract, retain and motivate the best

people. From a corporate viewpoint, PLC programme is consistent with the

economic ownership model whereby ownership is institutionalized and

management is left to professionals who are to be adequately incentivised to

drive performance. The alignment of shareholder and management’s interest is

in the interest of both. From a national perspective, the pressure for better

accountability and performance in Corporations has never been greater. New

engines of growth need to be identified and existing economic engines need to

be competitive if we are to survive in the global economic order. In the period

immediately following the financial crisis, we have spent much effort

restructuring. But we cannot stop there; all the past efforts would be for nothing if

we do not move on to the next level. Bu driving GLCs towards higher

performance and global competitiveness, GLCs will lead the private sector in

generating long term sustainable growth for Malaysia.”

Speech by YB Tan Sri Nor Mohamed Yakcop,

Finance Minister II, Malaysia, 14 May 2004.

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The focus of the Guiding Principles8 has been on the implementation of Key

Performance Indicators (KPIs), and the introduction of Performance Linked

Compensation (PLC). PLC is not about compensation structure alone, it is an all

encompassing process of:

• Identifying the strategic direction and targets for the company,

• Aligning management’s focus towards these goals,

• The ongoing process of review and appraisal to keep the company on

track, and

• In the process, sharing the success of the company in terms of

rewarding employees.

The governance structure of each company will be the proper channel for

implementing the PLC programme. There are four main areas:

• KPI Design

• Base Pay

• Performance Bonus

• Eligibility

5.4.1 KPI Design

Balanced and wholistic set of KPs

As a business foundation, any organization will have its corporate mission and

strategy. In formulating the KPIs, there should be a clear link with corporate

mission and specifically business plans. The choice and selection of the right

KPIs cannot be overemphasized and has to be developed with the corporate

strategy and mission in mind:

8 Performance Linked Compensation: Guidelines & Implementation by YB Tan Sri Nor Mohamed Yakcop, Finance Minister II, Culture of High Performance for Government Linked Companies, Seminar on 14 May 2004, Ministry of Finance, Putrajaya.

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i. KPIs selected must be actionable; that is they should be within the

control of management and the outcome is capable of being influenced

by management’s action or inaction.

ii. KPIs must be measurable. The objectivity of measurements is critical

but it does not mean that KPIs should not include subjective areas. In

areas such as customer satisfaction, independent surveys may be

used as a proxy measure

iii. Avoid KPIs that encourage short term outlook. KPIs design must allow

for progressive growth. Do not for example, sacrifice efforts which

bring benefits in the long-run such as training and research, just to

show better results.

Targets should be benchmarked against industry peers, either domestically or if

available, internationally. It is not sufficient that targets are based on historical

trends if those trends have not been up to the mark. In many cases, industry-

wide data are available as comparisons. The number of KPIs should not be too

many to ensure clarity and focus. Best practice would suggest scorecards

containing between five to eight KPIs. The KPIs selected should also be

weighted to ensure that more important business objectives are given emphasis.

Targets should be set annually in line with changes in business objectives

Where actual results to-date are behind targets, remedial action should be taken

to review and address the situation.

5.4.2 Base Pay

As a guide, executives base pay should be set at the market average of

comparator companies. The choice of comparator companies is critical as the

results may be skewed depending on the companies selected. The companies

selected should have common operational characteristics such as size and

markets. There should not be indiscriminate use of data to justify higher

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compensation without regard to the local conditions. Nevertheless, in the quest

for specific talent, specific compensation package which is personal to holder

could be offered; such situation should be referred to the major shareholder.

5.4.3 Performance Bonus Achieving minimum threshold When setting performance threshold, there should be a minimum threshold

below which no performance bonus should be made. There should not be a

situation where an executive achieves 20% of the target and still be entitled to

receive 20% of the performance bonus. The guidelines suggest that bonuses

should not be payable for performance below 50% of the KPIs targets.

Linking payout to KPI score There should be correlation between KPI score and payout. Nonetheless, a

“modifier” should be introduced to limit the performance payout for exceptional

situations arising in the year. For example, it may be decided that despite

management achieving the KPIs, the business reputation has suffered as a result

of a major negative event such as a major industrial accident that could have

been avoided. In this situation, it is appropriate to limit the extent of the pay-out.

Market Competitive Bonus To attract the best candidate and ensure the best performance, the performance

bonus should be a real incentive. Good performance should be rewarded.

However, there should not be an over-skewed compensation where there is no

internal equity and the payout has no linkage to performance. Perverse

behaviour focusing on short term gains, non-congruence of overall corporate

goals and manipulation of results should be avoided.

Use of Cash Rewards

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Rewards can be a combination of cash or shares and the concept of “self-

funded” performance bonus should be used. The ability to afford the payout is a

given. Hence, performance bonus should only be given out from profits earned

out of superior performance. If the base financial targets are set at, say, 12%

ROE, no performance bonus may be paid out if this is not achieved. The bonus

pool established should be shared between executives and shareholders to

preserve equity to the providers of capital.

Use of Shares Typically long term incentives comprise shares provided this is applicable to the

company and the major shareholder can afford to dilute the shareholding. No

discounts from market are to be given for share options under the scheme as the

value to the staff needs to be earned from improved market price of the shares in

the future rather than existing shareholders at the present.

5.4.4 Eligibility

Senior Management Senior management typically comprises the CEO, the direct reports and those

immediately below that. However, the definition of senior management will vary

depending on the organization structure. What is key is that this group of people

have a direct influence on the company’s performance. It is expected that the

CEO and direct reports, should gradually become contract positions. The

possibility of non-renewal of contract is one way to encourage performance; and

any vacancies should be made available to internal and external candidates.

Terminations should be exercised for non-performance.

Other Employees The principles of performance linked compensation must be applied to all levels

of the organization. It is however recognized that there is a difference in risk and

return between management and other employees. Under the scheme, senior

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management will be subject to employment contracts, a high variable element to

wages and very much tied to the company’s performance. Other employees

whilst subject to performance will not be burdened with as much risk.

Non Executive Directors Non-executives such as non-executive Directors are not eligible under this

scheme; however they may participate in the standard ESOS scheme. This

prohibition is to ensure proper check and balance.

5.4.5 Implementation

A project Steering Committee for the implementation of the PLC should be set

up. This committee would report to the Board or Board of Remuneration

Committee. The Guiding Principles should be used in the implementation and

any variation has to be refered to the PLC Steering Committee for clarification

and guidance.

5.4.6 Performance Based Elements in Collective Agreements

In 2006, the National Productivity Corporation9, Malaysia carried out a study to

gauge the extent of performance-based elements adopted by unionised firms. It

is encouraging to note that 61% of 373 unionised firms had incorporated

performance criteria in their Collective Agreements as follows:

Performance Elements % Discretionary bonus that is based on individual, 22.5

department or overall company performance

Commitment in ensuring timeliness, discipline 20.6

9 Performance Based Elements in Collective Agreements, NPC Malaysia, 2006

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and ensuring quality of output

Merit increment whereby the quantum of increment 12.8

Varies according to employees performance

Profit-based Bonuses 10.2

Service or performance incentives that are 7.5

Distributed based on performance of employees

Skills allowance that provides additional incentives 3.0

For utilization of skills and knowledge acquired

6.0 Case Experience: Performance Management System of Corporation XYZ

The challenges facing Corporation XYZ include:

• To be a global player

• To realize full potential of the Corporation with competent leadership

• To become a value added organization with high performance culture

• To sustain 15% dividend from our investment

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6.1 OVERALL APPROACH OF THE GLC

Felda Group Business Strategy

Strategic Intent

Business Strategies

Business

Performance Driver

Analysis

Understanding primary factors that impact

FELDA Group’s success

Organisation Design

Organisation Capabilities

Manpower Modelling Selection

Value Driver Analysis

Organisation

core competencies

Learning Organisation

Key Performance

Indicators (Organisation Scorecard)

O R G A N I S A T I O N

C U L T U R E

“How”

“What”

Succession Planning

Career Development

Performance Management

System

Reward System

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Performance Management is a shared responsibility between the organization,

staff, reporting managers and reviewing managers.

Staff who is the appraisee, takes responsibility for self in the process, sees

feedback on performance and uses organizational resources for self

development. Reporting Manager who is the direct superior of the appraisee

and is accountable for his/her performance evaluation and reviewing manager

who is the direct or indirect superior of the reporting manager and is

responsible for the overall performance of the business unit/group function and

department.

Performance management should reinforce the importance of both results and

behaviours/skills. The focus is on both results (Key Performance Indicators)

and behaviours and skills (competencies).

6.2 The “What” and “How” of Performance Management System

If what people achieve is important … If how people achieve it is important ..

…. Focus on results

…. Focus on

behaviors and skills

Key performance Indicators

Competencies

Performance Management (PM) should reinforce the importance of both results AND behaviors / skills

Performance = “what” + “how”

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Performance = KPIs (60%) + Competencies (40%)

Results Based Goals (KPIs) Competency Indicators

Financial Communication

• ROE Teamwork

• Revenue Growth Innovation and Change

Customer Leadership & nurturing talent

• Customer Satisfaction Index Drive & resilience

Internal Process Cultural sensitivity

• Cost to income ratio Business Acumen, negotiation

Learning and Innovation & deal making

• Employee Engagement Index Strategic thinking

• High Performer Attrition Rate

Project Goals

• IT Project

• HR Strategy Project

The Corporation’s definition of performance includes both KPIs and

Competencies in the PMS to ensure that both leading and lagging indicators of

performance are measured which will lead to long-term sustainable

performance:

• Measuring results help strengthen the link between individual goals and

business strategy

• Measuring competencies increases the focus on employee development

to enable the to achieve individual goals and align their behaviour to the

organisation’s values

• Both of these outcomes increase employee motivation to improve

business performance.

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6.3 The Performance Management System Cycle

Step 1 : Performance Planning

• Business goals, KPIs and targets set upfront and cascaded down the

organization

• Competencies are reviewed and development objectives identified

• Mid-year reviews conducted

Step 2 : Performance Assessment

• Quantitative targets independently computed

• Supervisor solicits inputs from peers, subordinates, clients

Step 2 : Performance Rewarding Performance results determine:

• Annual increments

• Bonuses and options

• Promotions

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6.4 LINKING PERFORMANCE WITH REWARDS The value drivers at business unit level are “translated” into focused performance objectives, which can be measured and

rewarded.

Value Driver

Business

Performance Drivers Analysis

Customer

KPI 1

Financial

KPI 2

pe r P f l o a r n m a n c e

Processes

KPI 3

People KPI4

Benefits

Base Salary

Increments

Bonus

REWARDS

“WHAT”

Measurement

Communication Teamwork Innovation & Change Accountability Organising, Planning & Decision Making Composure Business Acumen Service Orientation

+ “HOWS”

6.4.1 Overall Performance Rating for Salary Planning Purposes

The overall performance rating shall be based on the performance matrix ranging

from 1.0 – 5.0:

Performance Range

1.0 – 1.5 1.6 - 2.5 2.6 – 3.5 3.6 – 4.5 4.6 – 5.0

Needs most Need some Meets Exceeds Exceed

Improvement Improvement Requirement Some All

6.4.2 Assigning Rating

Each goals/target is assessed according to the employee’s level of achievement

• Quantitative goal : % of target achieved

• Qualitative goal : Assessment of goal and to what extent it was achieved

eg; full, partial etc.

An appropriate rating (1-5) is assigned for each goal

Only whole number ratings to be assigned

The weight rating for that category is derived.

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6.5 Simplified Example of Performance Appraisal Calculation : Top Management

6.5.1 Performance Goals (KPI Weightage : 60%)

KPI Weight Actual Rating Weighted Score (Min 10%) Achieved (1-5)

Profit before 30% 13.1 5 1.5

Tax

Total Production 20% 1008 5 1

Yield 15% 21.9 3 0.45

Cost 15% 110 3 0.45

Participation 10% 95 4 0.4

Mechanisation 10% 5 3 0.3

100% TOTAL 4.1

KPI Score 2.46 6.5.2 Competencies Competencies Weightage : 40% Competency Required Rating Comments Level Communication A1+ 4

Team Work A1+ 4

Innovation & Change A1+ 3

Leadership A1+ 4

Drive & resilience A1+ 4

Cultural sensitivity A1+ 4

Business Acumen A1+ 5

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Strategic Thinking A1+ 4

Total 32 Average Score 4 Competency Score 1.6 6.5.3 Overall Rating KPI Score + Competency Score = Overall Rating 2.46 + 1.6 = 4.06 The staff who achieves the overall rating of 4.06 falls into the category “exceeds

some requirements” and the salary increment and the bonus for the year will be

paid accordingly to pre-determined levels, which will be less than those who

“meet all” but more than those who just “meet requirements”, “need some

improvement” and “need most improvement”.

6.5.4 Success Criteria The system enables the corporation to achieve the following:

• Demonstrate that the performance management is a shared responsibility

between the employer and staff

• Increase focus on performance

• Align individual staff goals/KPIs with Group, Company and Departmental

objectives

• Improve rigor and calibration when setting target for the KPIs

• Set mutual performance expectations

• Increase focus on ongoing feedback and coaching

• Identify opportunities for staff development

• Increase focus on evaluating actual performance

• Improve the linkage between individual staff performance and rewards

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6.5.5 Common challenges faced:

• Projects are often given in the course of the year

• Goals keep changing throughout the year

• Too many external factors beyond my control

• Inappropriate targets

• The boss keeps giving me new things to do

7.0 The Productivity Linked Wage System

The Productivity-Linked Wage System (PLWS) has been recognized as

one of the measures to enhance Malaysia’s competitiveness. This system

will ensure that wage increases commensurate with productivity

increases. With higher productivity or performance, both employees and

firms should enjoy higher returns in terms of wages and profitability

respectively and ultimately contribute to higher standard of living and

better quality of life. The PLWS takes into account workers’ basic needs

and recommends that those who excelled in productivity are rewarded for

their efforts. Companies should strategize and link wages to productivity

to ensure that they remain competitive in a globalised economy.

The importance of PLWS has been mentioned in several National Plans.

One of the human policy thrusts in the Eighth Malaysia Plan, 2001-2005

emphasises the need to accelerate the implementation of PLWS to ensure

that wages are closely linked with productivity. The Third Outline

Perspective Plan, 2001-2010 (OPP3) stresses that wage increases should

commensurate with improvement in productivity to enhance the

competitiveness of the economy. It was also stated in the National

Economic Recovery Plan (1998) that wage increases should reflect

productivity gains of the country in order to remain competitive and

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recommended the implementation of a flexible wage system that is linked

to productivity/performance.

There is a need to accelerate implementation of the PLWS, so as to

ensure that wages are closely linked with productivity. By implementing

the PLWS, employers will be able to develop a wage structure that is able

to withstand economic changes and improve its competitive edge. At the

same time, a wider and systematic approach towards improving

productivity and wages through the active involvement and cooperation of

employees can be developed. The system also provides the motivating

factor, as employees will be rewarded for their efforts and will obtain a fair

share of the gains for productivity improvements.

7.1 Productivity-Linked Wage System Models

PLWS provides a formal framework linking wage increases to productivity

growth and comprises two main components namely the fixed and variable

components. The fixed component comprises the basic wages and annual

increment which provides income stability, acts as an indicator of the value for

of the job in the market and reflects the cost of living. The variable

components provide the variability determined by workers’ performances,

company’s profitability and performance of the economy. Three generic

models were developed for companies to adapt and adopt:

• Profitability model

• Productivity model

• Profitability/Productivity Matrix

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7.1.1 Profitability Model In this model, the variable performance bonus payment is dependent on the

company’s profitability. The quantum to be paid will be determined by a profit-

sharing formula that is agreed upon by management and union/workers

representative which is reviewed periodically. Wage incentives are paid if profits

exceed a pre-determined or threshold level.

7.1.2 Productivity Model Companies can also adopt the productivity model. A variable productivity

payment will be paid based on productivity improvement of the company or

individual. Wage incentives for the year would commensurates with productivity

increases. The formula for productivity measurement should be discussed and

agreed upon by both management and workers.

7.1.3 Profitability Productivity Matrix This two dimensional model links profitability and productivity. The bonus

payment made is dependent on both the worker’s productivity and company’s

profitability.

7.2 Steps in Implementing PLWS To encourage firm level implementation of a wage system that is linked to

productivity or performance, concerted efforts from the government, employers

and employees are required. There are various steps which a firm needs to fulfill

before PLWS can be successfully implemented. The following flowchart will

provide a guide for firms intending to implement PLWS (figure 5.1).

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Feedback from

workers/

Figure 5.1: Steps in Implementing PLWS

Create awareness on PLWS among top management of the firm through briefings/seminars

Educate workers on PLWS: - The importance of PLWS - The need for its implementation

Set up in-house committee to develop PLWS. Committee should include management

and employees

Compile data for measurement at firm level - Productivity & wages data - Develop a formula which best suits the firm

Review and adjust

Implement the system

Verify the measurement

to be used

Implement the measurement on

a trial basis

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Source: Handbook on Productivity Linked Wage System, National Productivity Corporation, 2005

The steps in implementing PLWS are as follows: Step 1: Creating Awareness of PLWS To encourage firms to adopt the PLWS, all employees must be made aware of

the system and educated on the rationale of the benefits of the system.

Employees must be convinced of the gains that will be shared by both parties in

the long run. Frequent discussions need to be organized over a period of time to

ensure that everyone in the organization is aware of the new system. A

feedback mechanism must also be established to accept views and opinions

from employees. An in-house /working committee or taskforce responsible for the

implementation of the system should be set up to facilitate the process. Ideally,

the committee should comprises representatives from different departments and

different levels of employees to ensure that everyone’s concerns are

incorporated and understood.

Step 2: Development of Measurement Tools One of the easiest ways to integrate productivity as part of an organizational

culture is to constantly make reference to it in quantitative terms. When

measurable, it becomes easier to monitor progress, provide feedback, evaluate

performance and set quantifiable productivity objectives. Management and

workers should work together to develop the best formula for linking wages to

productivity. This can also be linked to their profitability or other performance

indicators that are deemed suitable for the company. By having a measurement

system in place, the variable component can be adjusted according to the

company’s performance. These measurements does not need to be too technical

but must be agreed upon by both management and workers. The key for

developing the measurement will be to identify the key areas for improvement

and link them to the wage system. Any improvement in the key areas identified

will lead to an increase in the variable component of wages. For firm level

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measurement, National Productivity Corporation (NPC) has developed the

Company Productivity Assessment (COMPASS) which is a software containing a

host of measures for firms to adopt and adapt.

Step 3: Transition Period The transformation of the present wage system to a more variable one needs to

be facilitated. A phasing-in period should be allowed to put the PLWS into

practice and periodic reviews need to be made to rectify any discrepancies.

Normally, during the phasing-in period, employees will not suffer any undue loss

in income. Employees will still be getting wages from the present system while a

simulation of the new system is being carried out. An effective communication

channel needs to be established to keep employees informed of the development

and to give feedback on any suggestions for improvements. Management and

unions should appreciate the constraints in implementing the PLWS and should

work together during the transition period to sort out any differences and allow

provision for adjustments from time to time.

Step 4: Implementation of PLWS After the phasing-in period, increment in wages could be freely negotiated on an

annual basis at firm level. By then, management and workers should have

prepared themselves for such enterprise level negotiations and the wage

determination formula and data would also have been developed by them. The

choice of the method to link wages to productivity depends on the nature of the

enterprise and on the consensus between employers and employees on the

formula to be used. The following factors are relevant for the successful

implementation of the system at firm level:

There must be harmonious labour management relations and

mutual trust, information sharing and understanding.

Ensure annual increments are realistic after taking into account

inflation, economic growth and productivity growth when

determining annual increments.

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Document a formula to determine the variable payment. Any

system developed must be simple to administer and the process of

determining the formula should be consulted between employers

and employees.

The wage system should be applicable to the whole company.

There must be sufficient dissemination for the employees on the

formula developed, to ensure that employees understand how their

variable payments are calculated.

Allow for transition period where both the present and new systems

run at parallel levels and are constantly monitored. During this

period, there must be willingness to review and make adjustments

and changes.

Overall, the wage system should be specific, measurable,

achievable, realistic and time specific.

7.3 Criteria for Successful PLWS Implementation

Awareness and Commitment from Top Management Top management should be made aware of PLWS, and how the system can

contributes to improve the company’s competitive edge. Commitment from

management is mandatory to ensure that the system can be successfully

implemented at company level.

Information Sharing and Element of Trust Effective implementation of the system requires, management disclose

relevant financial information, future prospects of the company as well as the

company’s and industry’s performance. This is to avoid unwarranted union

resistance and employees’ suspicion.

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Consideration for Workers Welfare A major concern among workers is job stability and stable income. The

general consensus among workers is the unwillingness to change from a

wage system which incorporates automatic wage increases to a system that

is based on performance/productivity. An acceptable wage system should

also take into account the workers’ welfare and livelihood.

Reward for Improved Performance The PLWS basically consists of two components, the fixed component which

comprises the basic salary and an annual increment plus an additional

component in the form of variable payment. Thus, the fixed component would

serves as the measure of stability while the variable component ensures that

improved performance is properly rewarded.

Collaborative Effort The productivity/performance measurement should be collaboratively

developed by both employer and employee. The key indicators to be used

should be agreed upon by both parties to avoid any misunderstandings.

Assurance of the New System A transition period where the PLWS is phased-in is encouraged during the

implementation of the system. During this period, the PLWS could be

simulated and reviews should be made to ensure that the system is fair to

both employer as well as the employee.

Global Competition Employees should be exposed to the reality of global competition and its

effect on competitiveness at both national and firm level. Lack of knowledge

and exposure of the international market scenario will create unnecessary

resistance and rejection towards the system.

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Human Resource Development Human Resource Development is important in ensuring that a wage system

linking to productivity is successful. Staff training in areas of productivity

improvement and skills enhancement will enable workers to contribute

significantly to both output and productivity enhancement.

8.0 Company Case Experiences

It is imperative for companies to enhance competitiveness. This can be

achieved through the implementation of PLWS which link the payment of

wages to productivity and or performance. Two case studies of

companies who had implemented the system are presented:

• SKF Bearing Industries (M) Sdn. Bhd

• Maestro Swiss Management Services Sdn. Bhd.

8.1 SKF Bearing Industries (M) Sdn. Bhd 8.1.1 Overview of the Company

SKF bearing industries (M) Sdn. Bhd. was established in 1992. It is a

Swedish owned company that produces deep grove ball bearings and

spherical roller bearings that are used in elevators, paper making

machinery, electric motors, excavators, industrial fans, cars and

household appliances. The products are marketed to Japan, the Asia

Pacific and Europe. The company uses state of the art equipment for

producing quality bearings. The company adopted the Total Quality

Management (TQM) concept which emphasized on improving customer

satisfaction and expectations. Among the TQM activities which were

practiced by the company included Quality Improvement Teams, KAIZEN

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activities, and the Just In Time system which resulted in cost and quality

improvements.

To further improve these processes, the company benchmarked against

other SKF factories around the world and is now a benchmark for many

Malaysian industries. The company also emphasized the human factor

which includes facilities for staff and allowances as well as opportunities

for career advancements. An intensive start up human resource

development programme for staff was provided for the employees in

Europe while 2% of the company’s budget is allocated for human resource

development. The company has in-house trainers and provides on the job

training. Employees are encouraged to contribute innovative ideas and

rewards given for feasible ideas.

8.1.2 SKF’s Wage System

To improve productivity and company performance, the company has

shifted from an automatic annual increment system to one that is linked to

performance. The system comprised of the following:

Total Salary = Base Salary + Fixed Bonus + Variable Bonus.

The new model was developed in line with the SKF’s group renewal

mission “To contribute to SKF shareholders value expectation”. In this

model, bonus schemes were developed the both non-management and

management groups.

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Non-Management Group Variable Bonus The variable bonus was paid based on

• Company’s Profits

• Business Operating Income (BOI)

And is payable at the end of each financial year. Example of variable bonus calculation: Variable Bonus = BOI Threshold one month (X) + Over and above normal performance (Y). The bonus is then determined on the X and Y factors. If for a certain year

the company’s profits are below par, then each employee will receive one

month bonus. However, if the profit level is above the threshold level set,

then the management will pay according based on the performance:

8.1.3 Performance Based Bonus System Business Operating Income Fixed Bonus Variable Bonus Total (RM Million) (X) (Y) Months) Less than 10 1 0 1 11 1 0.25 1.25 12 1 0.5 1.5 13 1 0.75 1.75 14 1 1.0 1.0 15 1 1.25 2.25 16 1 1.5 2.5 17 1 1.75 2.75 18 1 2.0 3.0

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Management Group Variable Bonus Total Bonus = Fixed Bonus + Variable Factors Variable Factors and weighted and these include:

• BOI

• Productivity

• Zero Accident

• Efficiency

• Working Climate Analysis : level of improvements

8.1.4 Factors for Successful Implementation

• Objectives of the organization are defined to suit employees

scheme

• Employees are encourage to develop their own performance level

in line with business objectives

• Communication and transparency is important. This has helped

employees accept the system

• Identify gaps in performance

• Performance gaps identified and human resource development

undertaken to enhance performance.

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8.2 Maestro Swiss Management Services Sdn. Bhd.

Overview of the Company

Maestro Swiss Group is a leading manufacturer and marketer of chocolates and

chocolate products namely cocoa powder, cocoa butter, other cocoa based

products including chocolate malt food drinks, sweets, watfers and other

confectioneries in Malaysia. It has been in the business for over 27 years and

currently, the group is ISO 9001 certified. Prior to 1999 it was known as

Chocolate Products (M) Bhd. Among the brands that the company produces are

“Vochelle”, “Darry”, “CP”, “Maestro Swiss”, and “Vico”.

The group has about 350 employees comprising 50% males and 50% females.

Most of the employees have been with the company between 10 – 30 years and

have vast working experience in the industry. The workers are unionesed under

the Food Industry Employees Union. The company’s wage system before the

group was formed was based on fixed annual increments and the number of

years of service.

Maestro Swiss Wage System

Since the inception of the new group “Maestro Swiss”, the company embarked

on a new wage system which takes into account productivity of the company and

links this productivity towage increments. This is to ensure that competitiveness

of the company is sustained and employees are rewarded according to their

performance. To calculate productivity the company adopts the Added Value

concept.

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Added Value Concept

Added Value measures the wealth created through the production process and is

distributed to those who have contributed to the value creation. The Added value

formula is as follows :

Added Value = Total Output with less Bought-in Materials and Services

From this added value, productivity is calculated. The company uses labour

competitiveness to obtain its productivity ration.

Labour Competitiveness = Added Value / Labor Cost

= Added Value / Number of Employees

Labor Cost/Number of Employees

= Labor Productivity

Wage Rate

For Example : If added value = RM1,650,000 and number of employees is 200,

labour productivity will be : RM1,650,000/200 = RM8,250 per employee

If labour cost = RM200,000 then average wage rate for each employee will be :

RM200,00/200 = RM1,000 per employee

The company’s productivity will therefore be :

FM8,250/RM1,000 = RM8.25

For every RM1.00 of labour cost, RM8.25 of value added is generated.

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Productivity Model

The Productivity model is used to link productivity to wage increments. The

formula used is as flows : T = A + P where, T = Salary Increment

A = CPI Adjustment Based on 2/3 of Average increase of last 3

calendar years of CPI x Basic Salary

P = % P (% variable increment x Basic Salary (Refer to Table

1) where maximum CPI taken for any particular year is

6.0%

Example of Productivity Model Year 1 If a worker’s basic salary is RM1,000.00 per month and the CPI for the past 3

years is 2.5, 3.5 and 4.0 respectively and productivity improvement of the worker

is >4-8% (Table 1), then based on the productivity model his salary increment will

be as follows :

T = A + P A = (2/3 x 3.33% (average CPI for 3 years)) x RM1,000.00 (base salary) =

RM22.00 + P = (3% (variable productivity payment) x RM1,000) = RM30.00

New Salary = RM1,000.00 + RM22.00 + RM30.00 = RM1,052.00

Year 2 Based on an average 3 years CPI of 3.5% and a variable productivity payment of

>8-12% (Table 1), his salary increment will be :

T = A + P

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A = RM1,052.00 x (2/3 x 3.5% (average CPI for 3 years)) + P = RM25.00 +

(RM1,025 x 5% = RM53.00)

New Salary = RM1,052.00 + RM78.00 = RM1,130.00

In year 2, productivity has improved, therefore, the increment is higher :

Table 1 : Productivity Improvement / Variable Increment Table

Peformance

Productivity Improvement (Current

period vs. Previous Period) %

% P = Variable

Increment

Excellent > 12 9

Good > 8 – 12 5

Average > 4 – 8 3

Improvement Needed < 4 or = 4 1

Based on Table 1, if the company achieves a productivity improvement of

between > 4-8% then an employee will receive a 3% increase in the variable

payment. The higher the productivity improvement, the higher the variable

increments thus rewarding an employee with a bigger quantum. No matter wht

the productivity increments, the employee is still guaranteed his basic salary plus

annual increment which will not be less than 2/3 of the average increase of the

CPI over the previous three year period.

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Based on the above examples, the table for the Salary Structure is as follows:

SALARY STRUCTURE

JOB GRADE

POSITION MINRM

FORMULA FOR ANNUAL INCREMENT

MAX RM

PROMOTION INCREMENT QUANTUM

1 Senior Technician 1 Senior clerk

900 2,000 120

2 Senior Technician II Senior Clerk II

800 1,800 100

3 Technician Clerk II

700 1,700 80

4 Clerk I Production Worker 1

600

T = A+P where, T = Salary Increment A = CPI Adjustment based on 2/3 of average increase of Last 3 calendar years of CPI X basic Salary; P = % P (% variable increment : Refer to productivity table) X basic Salary; Where maximum CPI taken for any particular calendar year is 6.0%.

1,400 50

Factors for Successful Implementation

Good relations with the union and continuous negotiations helped the

company introduce the new wage system.

The company was transparent in its dealings with the workers and this

made the workers willing to accept the system

The company used a step-by-step approach whereby the workers were

given time to absorb the intricacies of the new system. The workers were

also well informed of any changes to the new system.

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9.0 Conclusion

The implementation of the Performance based Remuneration System among

enterprises in Malaysia had been identified as one of the initiatives to enhance

productivity and competitiveness of the country. The economy will be more

competitive if companies rationalize cost through higher productivity. Various

national development plans had also emphasized the need for linking wages to

performance, specifically the Productivity Linked Wage System (PLWS).

The PLWS will enable enterprises to adopt a systematic approach in linking

wages to productivity and to sustain labour cost competitiveness. Three

approaches had been developed to linke wages to productivity based on

Profitability, Productivity and the Productivity/Profitability Matrix. By

implementing the PLWS, performance of the enterprise will improve and

adjustments to accommodate changes in the business environment can be made

promptly. The system will ensure a Win-Win situation for both employers and

employees.

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References:

Annual Productivity Report 2006, National Productivity Corporation, Malaysia;

Productivity-Linked Wage System, 2005, National Productivity Corporation,

Malaysia;

Handbook on Productivity Linked Wage System, 2000, National Productivity

Corporation, Malaysia;

Economic Report, Malaysia, various issues, Ministry of Finance;

Ninth Malaysia Plan, 2006-2010, Economic Planning Unit, Prime Minister’s

Department, Malaysia;

Third Outline Perspective Plan, 2001-2010, Economic Planning Unit, Prime

Minister’s Department, Malaysia.

Third Industrial Master Plan (IMP3, 2006-2020)

World Competitiveness Year book (WCY), Institute for Management

Development (IMD), Lausanne, Switzerland various issues.